How Big Should Your Retirement Fund Be?

January 14, 2016

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Only about half of workers participate in a workplace
retirement savings plan, according to the Bureau of Labor Statistics. And
once they have a retirement account, few people ever do then math on
how much money they’ll need to be able to retire or check if they’re on pace to
get there. That’s why advisers use rules of thumb to help people figure out how
much money they should have saved when they retire, along with milestones they
should aim for at certain ages along the way.

For instance, you may have heard at one time or another that
it’s smart to save one times your salary by age 35. That is what
investment firm Fidelity Investments used to recommend that people save when
they’re starting out if they wanted to have reasonable financial security in
retirement. But now, Fidelity is saying, that’s not enough. Now, the firm is
recommending that people save one times their salary by their 30th birthday. By
the time they’re 35, savings should add up to double their annual pay. By 40, a
retirement account should hold three times a person’s salary. The numbers keep
growing, all the way to age 67, by which retirement savings should add up to 10
times a person’s pay.

For people who have never stopped to
think about how much income they’ll have in retirement or if they need to save
more, this timeline could push some people to pause and do the math, says
Jeanne Thompson, a vice president at Fidelity Investments. The firm updated
its guidelines last month to reflect a more conservative rate return
that it says is closer to what might be seen for a portfolio that is at
least 50 percent invested in stocks. The firm now assumes savings will grow by
about 3 percent a year on average, compared to the previous model that assumed
a fixed rate of return of 5.5 percent a year, including inflation adjustments.

The new rules are also meant to apply to a broader group of
workers and savers. (The previous guideline was based on a person earning
$70,000.) Given how much Americans already struggle with saving, the
numbers from Fidelity might hit some people like a punch in the gut. Too often,
workers realize just years before they hope to retire that they don’t have
anywhere near the amount of savings they’d need to pay the bills.

Indeed, more than half of people age 55 and up don’t
have any money saved for retirement, according to a 2015 report
from the Government Accountability Office. And about half of those
people aren’t getting a pension, leaving them with little to no retirement
income outside of Social Security benefits.

Still, this is just one guideline. And it is meant for
people who plan to retire at 67 and who want to have their savings provide at
least 45 percent of their pre-retirement pay. Those people who plan to work
longer, or who expect to have fewer expenses in retirement, should adjust
the guide to meet their needs, she says.

If this timeline scared you, use it as a prod to start
thinking about what you could do to boost your savings rate. For starters, the
guideline assumes that savers have been setting aside at least 15 percent
of their pay throughout their careers, including any employer
contributions. If you aren’t saving at least that much, that could be
one target to aim for. If you can’t save as much as you want to at the moment,
set it up so that your contribution rate increases automatically by one or two
percentage points each year.